! Week 4: Governance Dr Christopher Pokarier EB202 Introduction to Business

Transcription

1 Week 4: Governance! Dr Christopher Pokarier EB202 Introduction to Business

2 Governance! Public governance of businesses for society s sake! Public regulation to address negative impacts! But also to promote efficiency of markets + firms! Private governance of firms! Shareholder & financier controls over managers! Managerial controls over employees! This private governance is corporate governance but is often supported by public governance

3 Public governance of business! Regulations & institutions to promote socially-productive enterprise

4 Reasons for regulation of business! To address negative externalities : social impacts of business transactions that are not covered by the price and conditions of a private contract! eg. pollution which affects third parties! For efficiency reasons or when markets become dominated by one or several powerful firms (monopoly or oligopoly)! Eg. anti-trust policy! For special social or national interest reasons! but, unfortunately, often for private interest reasons in practice

5 State regulation of markets & firms! Regulation impacts on 3 dimensions of market! Industry structure! Firm conduct: corporate strategy & operations [which, in turn, may impact on industry structure]! Firm/industry performance: profitability, growth, & quality/price of goods! Governments may try to directly control one or all these (often clumsily)

6 Regulating incorporation of the firm! For transparency and accountability: to protect investors, customers, suppliers, third parties (other members of society)! For efficiency: easier business transactions and other business regulation! This also protects the firm somewhat from fraud & sets good standards ADDITIONAL RATIONALES! Firms benefit from social infrastructure so should be held responsible! Also, limited liability rules protect troubled businesses from debtors

7 Regulating foreign firms! Foreign firms (including large multinationals) must follow all the same rules as local firms! They often incorporate a subsidiary in the host country or are required to register a representative or branch office! In addition, they may face restrictions on the business sectors they can join, or be required to have a local partner! Foreign investment generally presents far fewer problems for national sovereignty than nationalists imagine

8 Corporate Governance! Protecting the assets and prospects of a firm from insiders

9 Protecting firm assets! A firm s assets (finance, property, reputation, technology, know-how etc) must be protected from needless loss & a good financial return earned from them! That return must be at least greater than the opportunity cost that is, what the assets could earn elsewhere! Corporate governance: focuses on relationship between external stakeholders (mainly shareholders) & managers to achieve this! Management: focuses on internal systems, controls and decision-making

10 Principal-agent problems! Public listed firms (shares are traded on the stock exchange) often have many small shareholders (owners) fragmented ownership! Owners (shareholders) are principals being residual claimants to the profits or losses of the firm and not having fixed compensation (unlike employees or the providers of loan capital)! + employees (including senior managers) are agents! BUT fragmented principals cannot easily monitor or control their agents! Hence agency slack problem! Many control (eg. accounting & auditing systems) and incentive mechanisms (stock options, bonuses etc) are used to reduce this.

11 Board of Directors + Managers! The Board of Directors are the shareholders representatives (at least in theory) & form a bridge between owners & the firm! Most decision-making is delegated to CEO & other senior managers! But directors have legal obligations to both society & investors! In Anglo-American nations directors are mostly external to the firm (nonexecutive directors / independent directors)! In Japan most directors are recruited from senior management and often were lifetime employees! This contributes to debates in Japan about who the firm belongs to

12 Internalisation & governance! Ronald Coase: firms exist because the minimise the transaction costs of coordinating an economic activity! Coordination brought in house, internalised within the boundaries of the firm not market-based! BUT hierarchy costs arise dispersed information, monitoring difficulties, managerial agency problems! Senior managers now must balance out-sourcing & smaller flat internal organisational arrangements! IT helps both external coordination & internal control

13 Exit, voice & loyalty! Economist Alfred Hirschman explains responses to declining performance by organizations! EXIT: customers & staff leave, shareholders sell out! VOICE: people express dissatisfaction! LOYALTY: people tolerate the poorer performance! Business studies focus on exit, political science focuses on voice

14 Interdependence! EXIT! Powerful signal of dissatisfaction! For small customers or small shareholders it is often easy! More difficult for large shareholders! Reasons for exit often not clear! Hence customer surveys etc! VOICE! Provides information on the nature of problems + potential solutions! But opportunities for the dissatisfied to express voice are limited! And managers/leaders may not listen THE EXIT OPTION MAKES VOICE MORE POWERFUL

15 Profit orientation: vital but risks! Short-term profit orientation risks social well-being & the firm over time

16 Public Actions : Private Reactions! Rules for workers rights (eg. maternity leave)! Protection of unions (eg. right to strike laws)! Tariff protection to promote national development & jobs! Rules to control prices! Firms might hire fewer staff covered by the laws! Powerful dominant shareholders in response! Higher prices to consumers, inefficiency, industry capture of state! Firms stop producing

17 Good corporate governance! Helps societies prosper but you can t please all the people all of the time